Did you know that tips aren’t just free money? As usual, the IRS wants to be part of your
income…every last drop. So yes, you have
to pay taxes on your tips. Specifically,
you have to pay Social Security and Medicare taxes on your tips…it’s only fair,
since these taxes are what will help you through retirement and old age. Everyone who makes money pays into the
system…including waitstaff, maids,
Tips are to be reported to your boss. If you didn’t know you had to do this, you
can still report your tips at tax time to the IRS. The way it’s supposed to work is, you report
your tips to your boss, then he or she withholds a certain amount from your
paycheck to cover his portion of these taxes, which he must send to the IRS
quarterly. Paying throughout the year
into the Social Security and Medicare taxes is how our Pay-As-You-Go tax system
works.
But, if you forgot or you didn’t know how this works, you
will use form 4137 when you file your federal taxes. This form will calculate how much in taxes
you will owe the IRS.
Even if you reported your tips to your boss, the salary may
not be enough to cover your taxes, since tip jobs usually have a very low wage
and the bulk of the income is through tips.
So, even if you reported your tips and money was withheld by your boss,
you may still owe taxes to the IRS.
You’re going to need IRS form 4137.
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